Company Quick10K Filing
Virtus Investment Partners
Price114.29 EPS9
Shares8 P/E12
MCap939 P/FCF-9
Net Debt13 EBIT101
TEV952 TEV/EBIT9
TTM 2019-09-30, in MM, except price, ratios
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VRTS 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 q218ex-311.htm
EX-31.2 q218ex-312.htm
EX-32.1 q218ex-321.htm

Virtus Investment Partners Earnings 2018-06-30

Balance SheetIncome StatementCash Flow
3.22.61.91.30.60.02012201420172020
Assets, Equity
0.20.10.10.0-0.0-0.12012201420172020
Rev, G Profit, Net Income
0.40.20.1-0.1-0.2-0.42012201420172020
Ops, Inv, Fin

10-Q 1 vrts0630201810-q.htm 10-Q VRTS JUNE 30, 2018 Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
 
 
 
 
FORM 10-Q
 
 
 
 
 

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-10994
 
 
 
 
 
 
virtuslogo2018a01.jpg
VIRTUS INVESTMENT PARTNERS, INC.
(Exact name of registrant as specified in its charter)
 
 
 
 
 

 
 
 
Delaware
 
26-3962811
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
100 Pearl St., Hartford, CT 06103
(Address of principal executive offices) (Zip Code)
(800) 248-7971
(Registrant’s telephone number, including area code)

 
 
 
 
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
 ¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x
The number of shares outstanding of the registrant’s common stock was 7,166,139 as of July 27, 2018.
 
 
 
 
 



VIRTUS INVESTMENT PARTNERS, INC.
INDEX
 
 
 
Page
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
"We," "us," "our," "the Company," and "Virtus" as used in this Quarterly Report on Form 10-Q, refer to Virtus Investment Partners, Inc., a Delaware corporation, and its subsidiaries.




PART I – FINANCIAL INFORMATION
 
Item 1.    Financial Statements
Virtus Investment Partners, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
 
June 30,
2018
 
December 31,
2017
($ in thousands, except share data)
 
 
 
Assets:
 
 
 
Cash and cash equivalents
$
138,827

 
$
132,150

Investments
87,209

 
108,492

Accounts receivable, net
67,810

 
65,648

Assets of consolidated investment products ("CIP")
 
 
 
Cash and cash equivalents of CIP
40,755

 
101,315

Cash pledged or on deposit of CIP
946

 
817

Investments of CIP
1,775,069

 
1,597,752

Other assets of CIP
34,605

 
33,486

Furniture, equipment and leasehold improvements, net
11,409

 
10,833

Intangible assets, net
291,894

 
301,954

Goodwill
170,153

 
170,153

Deferred taxes, net
31,133

 
32,428

Other assets
40,090

 
35,771

Total assets
$
2,689,900

 
$
2,590,799

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Accrued compensation and benefits
$
45,187

 
$
86,658

Accounts payable and accrued liabilities
25,805

 
29,607

Dividends payable
6,688

 
6,528

Debt
245,147

 
248,320

Other liabilities
39,236

 
39,895

Liabilities of CIP
 
 
 
Notes payable of CIP
1,569,663

 
1,457,435

Securities purchased payable and other liabilities of CIP
114,388

 
112,954

Total liabilities
2,046,114

 
1,981,397

Commitments and Contingencies (Note 14)

 

Redeemable noncontrolling interests of CIP
3,420

 
4,178

Equity:
 
 
 
Equity attributable to stockholders:
 
 
 
Series D mandatory convertible preferred stock, $0.01 par value, 1,150,000 shares authorized, issued and outstanding at June 30, 2018 and December 31, 2017
110,843

 
110,843

Common stock, $0.01 par value, 1,000,000,000 shares authorized; 10,523,050 shares issued and 7,166,139 shares outstanding at June 30, 2018 and 10,455,934 shares issued and 7,159,645 shares outstanding at December 31, 2017
105

 
105

Additional paid-in capital
1,213,341

 
1,216,173

Retained earnings (accumulated deficit)
(340,024
)
 
(386,216
)
Accumulated other comprehensive income (loss)
(622
)
 
(600
)
Treasury stock, at cost, 3,356,911 shares at June 30, 2018 and 3,296,289 shares at December 31, 2017, respectively
(359,248
)
 
(351,748
)
Total equity attributable to stockholders
624,395

 
588,557

Noncontrolling interests of CIP
15,971

 
16,667

Total equity
640,366

 
605,224

Total liabilities and equity
$
2,689,900

 
$
2,590,799


The accompanying notes are an integral part of these condensed consolidated financial statements.

1


Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
($ in thousands, except per share data)
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
Investment management fees
$
103,168

 
$
74,062

 
$
203,644

 
$
133,333

Distribution and service fees
13,549

 
10,439

 
26,156

 
21,222

Administration and shareholder service fees
15,967

 
9,476

 
31,705

 
18,457

Other income and fees
248

 
155

 
455

 
896

Total revenues
132,932

 
94,132

 
261,960

 
173,908

Operating Expenses
 
 
 
 
 
 
 
Employment expenses
54,868

 
42,992

 
115,564

 
82,633

Distribution and other asset-based expenses
23,721

 
15,764

 
46,012

 
31,087

Other operating expenses
19,128

 
20,236

 
35,990

 
33,462

Operating expenses of consolidated investment products ("CIP")
1,783

 
473

 
2,294

 
1,115

Restructuring and severance

 
8,894

 

 
8,894

Depreciation and other amortization
1,100

 
776

 
2,115

 
1,440

Amortization expense
5,024

 
1,813

 
10,060

 
2,046

Total operating expenses
105,624

 
90,948

 
212,035

 
160,677

Operating Income (Loss)
27,308

 
3,184

 
49,925

 
13,231

Other Income (Expense)
 
 
 
 
 
 
 
Realized and unrealized gain (loss) on investments, net
960

 
1,287

 
1,398

 
1,584

Realized and unrealized gain (loss) of CIP, net
(1,779
)
 
(1,424
)
 
480

 
3,020

Other income (expense), net
455

 
47

 
1,774

 
693

Total other income (expense), net
(364
)
 
(90
)
 
3,652

 
5,297

Interest Income (Expense)
 
 
 
 
 
 
 
Interest expense
(4,469
)
 
(3,739
)
 
(8,327
)
 
(3,982
)
Interest and dividend income
1,818

 
446

 
2,539

 
634

Interest and dividend income of investments of CIP
23,679

 
5,102

 
45,082

 
10,758

Interest expense of CIP
(15,278
)
 
(2,995
)
 
(29,827
)
 
(5,852
)
Total interest income (expense), net
5,750

 
(1,186
)
 
9,467

 
1,558

Income (Loss) Before Income Taxes
32,694

 
1,908

 
63,044

 
20,086

Income tax expense (benefit)
9,465

 
1,880

 
15,988

 
6,313

Net Income (Loss)
23,229

 
28

 
47,056

 
13,773

Noncontrolling interests
(159
)
 
(333
)
 
(686
)
 
(1,051
)
Net Income (Loss) Attributable to Stockholders
23,070

 
(305
)
 
46,370

 
12,722

Preferred stockholder dividends
(2,084
)
 
(2,084
)
 
(4,168
)
 
(4,168
)
Net Income (Loss) Attributable to Common Stockholders
$
20,986

 
$
(2,389
)
 
$
42,202

 
$
8,554

Earnings (Loss) per Share—Basic
$
2.91

 
$
(0.34
)
 
$
5.86

 
$
1.26

Earnings (Loss) per Share—Diluted
$
2.75

 
$
(0.34
)
 
$
5.52

 
$
1.22

Cash Dividends Declared per Preferred Share
$
1.81

 
$
1.81

 
$
3.63

 
$
3.63

Cash Dividends Declared per Common Share
$
0.45

 
$
0.45

 
$
0.90

 
$
0.90

Weighted Average Shares Outstanding—Basic (in thousands)
7,211

 
7,064

 
7,204

 
6,804

Weighted Average Shares Outstanding—Diluted (in thousands)
8,401

 
7,064

 
8,396

 
7,020


The accompanying notes are an integral part of these condensed consolidated financial statements.

2


Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
($ in thousands)
 
 
 
 
 
 
 
Net Income (Loss)
$
23,229

 
$
28

 
$
47,056

 
$
13,773

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of tax of $6 and $2 for the three and six months ended June 30, 2018, respectively.
(18
)
 
2

 
(8
)
 
2

Unrealized gain (loss) on available-for-sale securities, net of tax of ($20) and ($29) for the three months ended June 30, 2018 and 2017, respectively, and $77 and ($83) for the six months ended June 30, 2018 and 2017, respectively
57

 
46

 
(192
)
 
134

Other comprehensive income (loss)
39

 
48

 
(200
)
 
136

Comprehensive income (loss)
23,268

 
76

 
46,856

 
13,909

Comprehensive (income) loss attributable to noncontrolling interests
(159
)
 
(333
)
 
(686
)
 
(1,051
)
Comprehensive Income (Loss) Attributable to Stockholders
$
23,109

 
$
(257
)
 
$
46,170

 
$
12,858

The accompanying notes are an integral part of these condensed consolidated financial statements.

3




Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended
June 30,
 
2018
 
2017
($ in thousands)
 
 
 
Cash Flows from Operating Activities:
 
 
 
Net income (loss)
$
47,056

 
$
13,773

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation expense, intangible asset and other amortization
13,641

 
4,894

Stock-based compensation
12,073

 
9,490

Amortization of deferred commissions
1,646

 
1,072

Payments of deferred commissions
(2,600
)
 
(1,389
)
Equity in earnings of equity method investments
(1,801
)
 
(679
)
Realized and unrealized (gains) losses on trading securities, net
(1,398
)
 
(1,584
)
Distributions from equity method investments
669

 

Sales (purchases) of trading securities, net
6,150

 
5,558

Deferred taxes, net
1,374

 
(576
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net and other assets
(5,469
)
 
(7,359
)
Accrued compensation and benefits, accounts payable, accrued liabilities and other liabilities
(45,713
)
 
(22,465
)
Operating activities of consolidated investment products ("CIP"):
 
 
 
Realized and unrealized (gains) losses on investments of CIP, net
(608
)
 
(2,879
)
Purchases of investments by CIP
(641,236
)
 
(150,500
)
Sales of investments by CIP
465,213

 
205,347

Net purchases of short term investments by CIP
97

 
265

Sales (purchases) of securities sold short by CIP, net
187

 
153

Change in other assets of CIP
(829
)
 
1,589

Change in liabilities of CIP
(2,965
)
 
(208
)
Net cash provided by (used in) operating activities
(154,513
)
 
54,502

Cash Flows from Investing Activities:
 
 
 
Capital expenditures
(2,274
)
 
(678
)
Change in cash and cash equivalents of CIP due to consolidation, net

 
5,466

Acquisition of business (cash paid $471.4 million, less cash acquired $77.6 million)

 
(393,784
)
Sale of available-for-sale securities
37,785

 

Purchases of available-for-sale securities
(20,188
)
 
(130
)
Net cash provided by (used in) investing activities
15,323

 
(389,126
)
Cash Flows from Financing Activities:
 
 
 
Issuance of debt

 
260,000

Repayments on debt
(1,300
)
 
(30,271
)
Payment of deferred financing costs
(3,548
)
 
(15,520
)
Proceeds from issuance of mandatory convertible preferred stock, net of issuance costs

 
111,004

Proceeds from issuance of common stock, net of issuance costs

 
109,487

Common stock dividends paid
(6,735
)
 
(6,060
)
Preferred stock dividends paid
(4,168
)
 
(2,084
)
Repurchases of common shares
(7,500
)
 

Stock options exercised
698

 
86

Taxes paid related to net share settlement of restricted stock units
(5,238
)
 
(3,029
)
Contributions (redemptions) of noncontrolling interests, net
(2,140
)
 
7,733

 
 
 
 
Financing activities of CIP:
 
 
 
Proceeds from issuance of notes payable by CIP
784,867

 

Repayment of notes payable by CIP
(669,500
)
 
(500
)
Net cash provided by (used in) financing activities
85,436

 
430,846

Net increase (decrease) in cash and cash equivalents
(53,754
)
 
96,222

Cash and cash equivalents, beginning of period
234,282

 
83,671

Cash and Cash Equivalent, End of Period
$
180,528

 
$
179,893

Non-Cash Investing Activities:
 
 
 
Change in accrual for capital expenditures
$
(439
)
 
$
(174
)
Non-Cash Financing Activities:
 
 
 
Increase (decrease) to noncontrolling interest due to consolidation (deconsolidation) of CIP, net
$

 
$
11,286

Stock issued for acquisition of business
$

 
$
21,738

Contingent consideration for acquisition of business
$

 
$
51,690

Common stock dividends payable
$
3,225

 
$
3,248

Preferred stock dividends payable
$
2,084

 
$
2,084

Accrued stock issuance costs
$

 
$
334


 
June 30, 2018
 
December 31, 2017
($ in thousands)
 
 
 
Reconciliation of cash and cash equivalents
 
 
 
Cash and cash equivalents
$
138,827

 
$
132,150

Cash of consolidated investment products
40,755

 
101,315

Cash pledged or on deposit of consolidated investment products
946

 
817

Cash and cash equivalents at end of period
$
180,528

 
$
234,282









The accompanying notes are an integral part of these condensed consolidated financial statements.

4


Virtus Investment Partners, Inc.
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
 
Common Stock
 
Preferred Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury Stock
 
Total
Attributed To
Stockholders
 
Non-
controlling
Interests
 
Total
Equity
 
Redeemable
Non-
controlling
Interests
($ in thousands, except per share data)
Shares
 
Par Value
 
Shares
 
Amount
 
Shares
 
Amount
 
Balances at December 31, 2016
5,889,013

 
$
91

 

 
$

 
$
1,090,331

 
$
(424,279
)
 
$
(224
)
 
3,230,045

 
$
(344,246
)
 
$
321,673

 
$

 
$
321,673

 
$
37,266

Adjustment for adoption of ASU 2016-09

 

 

 

 

 
1,051

 

 

 

 
1,051

 

 
1,051

 

Net income (loss)

 

 

 

 

 
12,722

 

 

 

 
12,722

 

 
12,722

 
1,051

Net unrealized gain (loss) on securities available-for-sale

 

 

 

 

 

 
134

 

 

 
134

 

 
134

 

Foreign currency translation adjustments

 

 

 

 

 

 
2

 

 

 
2

 

 
2

 

Activity of noncontrolling interests, net

 

 

 

 

 

 

 

 

 

 
15,731

 
15,731

 
19,019

Issuance of mandatory convertible preferred stock, net of offering costs

 

 
1,150,000

 
110,837

 

 

 

 

 

 
110,837

 

 
110,837

 

Cash dividends declared ($3.625 per preferred share)

 

 

 

 
(4,168
)
 

 

 

 

 
(4,168
)
 

 
(4,168
)
 

Issuance of common stock for acquisition of business
213,669

 
2

 

 

 
21,738

 

 

 

 

 
21,740

 

 
21,740

 

Issuance of common stock, net of offering costs
1,046,500

 
10

 

 

 
109,310

 

 

 

 

 
109,320

 

 
109,320

 

Cash dividends declared ($0.90 per common share)

 

 

 

 
(6,670
)
 

 

 

 

 
(6,670
)
 

 
(6,670
)
 

Issuance of common shares related to employee stock transactions
68,726

 
1

 

 

 
816

 

 

 

 

 
817

 

 
817

 

Taxes paid on stock-based compensation

 

 

 

 
(3,029
)
 

 

 

 

 
(3,029
)
 

 
(3,029
)
 

Stock-based compensation

 

 

 

 
9,173

 

 

 

 

 
9,173

 

 
9,173

 

Balances at June 30, 2017
7,217,908

 
$
104

 
1,150,000

 
$
110,837

 
$
1,217,501

 
$
(410,506
)
 
$
(88
)
 
3,230,045

 
$
(344,246
)
 
$
573,602

 
$
15,731

 
$
589,333

 
$
57,336

Balances at December 31, 2017
7,159,645

 
$
105

 
1,150,000

 
$
110,843

 
$
1,216,173

 
$
(386,216
)
 
$
(600
)
 
3,296,289

 
$
(351,748
)
 
$
588,557

 
$
16,667

 
$
605,224

 
$
4,178

Adjustment for adoption of ASU 2016-01

 

 

 

 

 
(178
)
 
178

 

 

 

 

 

 

Net income (loss)

 

 

 

 

 
46,370

 

 

 

 
46,370

 
766

 
47,136

 
(80
)
Net unrealized gain (loss) on securities available-for-sale

 

 

 

 

 

 
(192
)
 

 

 
(192
)
 

 
(192
)
 

Foreign currency translation adjustments

 

 

 

 

 

 
(8
)
 

 

 
(8
)
 

 
(8
)
 

Activity of noncontrolling interests, net

 

 

 

 

 

 

 

 

 

 
(1,462
)
 
(1,462
)
 
(678
)
Cash dividends declared ($3.625 per preferred share)

 

 

 

 
(4,168
)
 

 

 

 

 
(4,168
)
 

 
(4,168
)
 

Cash dividends declared ($0.90 per common share)

 

 

 

 
(6,877
)
 

 

 

 

 
(6,877
)
 

 
(6,877
)
 

Repurchases of common shares
(60,622
)
 

 

 

 

 

 

 
60,622

 
(7,500
)
 
(7,500
)
 

 
(7,500
)
 

Issuance of common shares related to employee stock transactions
67,116

 

 

 

 
1,378

 

 

 

 

 
1,378

 

 
1,378

 

Taxes paid on stock-based compensation

 

 

 

 
(5,238
)
 

 

 

 

 
(5,238
)
 
 
 
(5,238
)
 

Stock-based compensation

 

 

 

 
12,073

 

 

 

 

 
12,073

 

 
12,073

 

Balances at June 30, 2018
7,166,139

 
$
105

 
1,150,000

 
$
110,843

 
$
1,213,341

 
$
(340,024
)
 
$
(622
)
 
3,356,911

 
$
(359,248
)
 
$
624,395

 
$
15,971

 
$
640,366

 
$
3,420

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


Virtus Investment Partners, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Business

Virtus Investment Partners, Inc. ("the Company," "we," "us," "our" or "Virtus"), a Delaware corporation, operates in the investment management industry through its subsidiaries.

The Company provides investment management and related services to individuals and institutions. The Company’s retail investment management services are provided to individuals through products consisting of U.S. 1940 Act mutual funds and Undertaking for Collective Investment in Transferable Securities ("UCITS") (collectively, "open-end funds"), closed-end funds, exchange traded funds ("ETFs") and retail separate accounts. Institutional investment management services are provided to corporations, multi-employer retirement funds, employee retirement systems, foundations, endowments, structured products and as a subadviser to unaffiliated mutual funds.



2. Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Company’s financial condition and results of operations. Operating results for the six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.
These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission. The Company’s significant accounting policies, which have been consistently applied, are summarized in its 2017 Annual Report on Form 10-K.

The Company has reclassified certain amounts in prior-period financial statements to conform to the current period's presentation. The reclassifications were not material to the condensed consolidated financial statements.

New Accounting Standards Implemented

On January 1, 2018, the Company adopted the new Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), pursuant to Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, and all the related amendments ("the new revenue standard") using the modified retrospective approach. The core principle of the new revenue standard is that revenue is recognized upon the transfer of promised goods or services to customers in an amount that reflects the expected consideration to be received for the goods or services. Based on the revised criteria in the new revenue standard for determining whether the Company is acting as a principal or agent, certain costs that were previously presented on a net of revenue basis are now presented on a gross basis. The comparative periods have not been restated and continue to be reported under the accounting standards in effect for those periods. No cumulative-effect adjustment to the balance sheet was necessary upon the adoption of ASC 606. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.

ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). On January 1, 2018, the Company adopted amendments to ASC 825 - Financial Instruments pursuant to ASU 2016-01. This standard requires all equity investments (other than those accounted for under the equity method) to be measured at fair value with changes in the fair value recognized through net income. The Company recorded a $0.2 million cumulative-effect adjustment to the balance sheet upon adoption.

ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). On January 1, 2018, the Company adopted amendments to ASC 230 - Statement of Cash Flows ("ASC 230") on a retrospective basis pursuant to ASU 2016-15. This standard clarifies the treatment of several cash flow activities. ASU 2016-15 also clarifies that when cash

6


receipts and cash payments have aspects of more than one classification of cash flows and cannot be separated, classification will depend on the predominant source or use. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.

ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"). On January 1, 2018, the Company adopted amendments to ASC 230 on a retrospective basis pursuant to ASU 2016-18. This standard requires the inclusion of restricted cash with cash and cash equivalents when reconciling the beginning and ending cash on the statement of cash flows. Restricted cash includes cash pledged or on deposit with brokers of consolidated investment products. Cash, cash equivalents and restricted cash reported on the condensed consolidated statements of cash flows now includes $0.8 million, $0.9 million and $1.0 million of cash pledged or on deposit of consolidated investment products as of December 31, 2017, June 30, 2017, and December 31, 2016, respectively, as well as previously reported cash and cash equivalents. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.

ASU 2017-01, Clarifying the Definition of a Business ("ASU 2017-01"). On January 1, 2018, the Company adopted amendments to ASC 805 - Business Combinations ("ASC 805") pursuant to ASU 2017-01, and will apply the standard prospectively. This standard provides guidance on evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.

ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Accounting for Goodwill Impairment ("ASU 2017-04"). On January 1, 2018, the Company adopted amendments to ASC 350 - Intangibles Goodwill and Other pursuant to ASU 2017-04, and will apply the standard prospectively for all future annual and interim goodwill impairment tests . Under ASU 2017-04, a goodwill impairment is defined to be the amount by which a reporting unit’s carrying value exceeds its fair value. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.

ASU 2018-05, Income Taxes (Topic 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 ("ASU 2018-05"). In March 2018, the Company adopted the amendments to ASC 740 - Income Taxes pursuant to ASU 2018-05. The standard adds various Securities and Exchange Commission ("SEC") paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities’ ability to comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs Act in the period of enactment on a timely basis. SAB 118 allows disclosure stating that timely determination of some or all of the income tax effects from the Tax Cuts and Jobs Act are incomplete by the due date of the financial statements and if possible to provide a reasonable estimate of the income tax effects. We have accounted for the tax effects of the Tax Cuts and Jobs Act under the guidance of SAB 118, on a provisional basis. Our accounting for certain income tax effects is incomplete, but we have determined reasonable estimates for those effects and have recorded provisional amounts in our condensed consolidated financial statements as of June 30, 2018 and December 31, 2017.

New Accounting Standards Not Yet Implemented
    
In July 2018, the FASB issued ASU 2018-09, Codification Improvements ("ASU 2018-09"). This standard does not prescribe any new accounting guidance, but instead makes minor improvements and clarifications of several different FASB ASC areas based on comments and suggestions made by various stakeholders.  Certain updates are applicable immediately while other updates provide for a transition period for adoption over the next fiscal year beginning after December 15, 2018.  The Company is currently evaluating the potential impact of the guidance but does not expect the adoption of this standard to have a material impact on the Company's condensed consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"). The standard provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on the Company's condensed consolidated financial statements.        

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). The standard replaces current codification Topic 840 - Leases with updated guidance on accounting for leases and requires a lessee to recognize assets and liabilities arising from an operating lease on the balance sheet, whereas previous guidance did not require lease assets and

7


liabilities to be recognized for most leases. Furthermore, this standard permits companies to make an accounting policy election to not recognize lease assets and liabilities for leases with a term of 12 months or less. For both finance leases and operating leases, the lease liability should be initially measured at the present value of the lease payments. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will not significantly change under this new guidance. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 (Leases), which provides narrow amendments to clarify how to apply certain aspects of ASU 2016-02. Both standards are effective for fiscal years beginning after December 15, 2018 and interim periods therein. Early adoption is permitted. The Company is currently evaluating the potential impact of this standard on its condensed consolidated financial statements but expects to record a right-of-use asset and a related lease obligation in the Company's condensed consolidated balance sheet upon adoption.
        
    

3. Revenues

Adoption of ASC 606, Revenue from Contracts with Customers

The Company's revenues are recognized when a performance obligation is satisfied, which occurs when control of the services is transferred to customers. Investment management fees, distribution and service fees and administration and shareholder service fees are generally calculated as a percentage of average net assets of the investment portfolios managed. The net asset values from which investment management, distribution and service and administration and shareholder service fees are calculated, are variable in nature and subject to factors outside of the Company's control such as deposits, withdrawals and market performance. Because of this, they are considered constrained until the end of the contractual measurement period (monthly or quarterly) which is when asset values are generally determinable.

Revenue Disaggregated by Source
The following table summarizes revenue by source:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017 (1)
 
2018
 
2017 (1)
($ in thousands)
 
 
 
 
 
 
 
Investment management fees
 
 
 
 
 
 
 
Open-end funds
$
57,192

 
$
39,186

 
$
111,566

 
$
69,712

Closed-end funds
10,168

 
11,174

 
20,547

 
22,253

Retail separate accounts
17,091

 
12,759

 
33,620

 
24,192

Institutional accounts
15,778

 
8,790

 
31,596

 
13,931

Structured products
2,068

 
1,163

 
4,394

 
1,662

Other products
871

 
990

 
1,921

 
1,583

Total investment management fees
103,168

 
74,062

 
203,644

 
133,333

Distribution and service fees
13,549

 
10,439

 
26,156

 
21,222

Administration and shareholder service fees
15,967

 
9,476

 
31,705

 
18,457

Other income and fees
248

 
155

 
455

 
896

Total revenues
$
132,932

 
$
94,132

 
$
261,960

 
$
173,908

(1)
Prior period amounts have not been adjusted and are reported in accordance with historical accounting under ASC 605, Revenue Recognition.

    
Investment Management Fees

The Company provides investment management services pursuant to investment management agreements through its affiliated investment advisers (each an "Adviser"). Investment management services represent a series of distinct daily service periods which are performed over time. With respect to the Company's funds, the Company earns fees based on each fund’s average daily or weekly net assets which are generally received and calculated on a monthly basis. The Company has recorded its management fees net of investment management fees paid to unaffiliated subadvisers, as the Company considers itself an agent of the fund as it relates to the day-to-day investment management services performed by unaffiliated subadvisers. With respect to services performed by the unaffiliated subadviser, the Company's performance obligation is to arrange for the provision of that service, and it does not control the specified service before that service is performed. Amounts paid to unaffiliated subadvisers for the three and six months ended June 30, 2018 were $12.3 million and $25.2 million, respectively.

8



Retail separate account fees are calculated based on the end of the preceding or current quarter's asset values or on an average of month-end balances. Institutional account fees are calculated based on an average of month-end balances or current quarter’s asset values. Fees for structured finance products, for which the Company acts as the collateral manager, consist of senior, subordinated and, in certain instances, incentive management fees. Senior and subordinated management fees are calculated at a contractual fee rate applied against the end of the preceding quarter par value of the total collateral being managed with subordinated fees being recognized only after certain portfolio criteria are met. Incentive fees on certain of the Company's CLOs are typically 20% of the excess cash flows available to holders of the subordinated notes, above a threshold level internal rate of return.

Distribution and Service Fees

Distribution and service fees are asset-based fees earned from open-end funds for distribution services. Depending on the fund type or share class, these fees primarily consist of an asset-based fee (12b-1 fee) that is charged to the fund over a period of years to cover allowable sales and marketing expenses for the fund or front-end sales charges which are based on a percentage of the offering price. Asset-based distribution and service fees are primarily based on percentages of the average daily net assets value and are paid monthly pursuant to the terms of the respective distribution and service fee contracts.

Distribution and service fees represent two performance obligations comprised of distribution and related shareholder servicing activities. Distribution services are generally satisfied upon the sale of a fund share. Shareholder servicing activities are generally services satisfied over time.

The Company distributes its open-end funds through unaffiliated financial intermediaries that comprise national and regional broker dealers. These unaffiliated financial intermediaries provide distribution and shareholder service activities on behalf of the Company. The Company passes related distribution and service fees to these unaffiliated financial intermediaries for these services and considers itself the principal in these arrangements as it has control of the services prior to the services being transferred to the customer. These payments are classified within distribution and other asset-based expenses.

Administration & Shareholder Service Fees

The Company provides administrative fund services to its open-end funds and certain of its closed-end funds and shareholder services to its open-end funds. Administration and shareholder services are performed over time. The Company earns fees based on each fund’s average daily or weekly net assets which are calculated and paid monthly. Administrative fund services include: record keeping, preparing and filing documents required to comply with securities laws, legal administration and compliance services, customer service, supervision of the activities of the funds’ service providers, tax services and treasury services as well as providing office space, equipment and personnel that may be necessary for managing and administering the business affairs of the funds. Shareholder services include maintaining shareholder accounts, processing shareholder transactions, preparing filings and performing necessary reporting, among other things.

Financial Statement Impact of the Adoption of ASC 606    

The adoption of ASC 606 resulted in a change from the Company’s treatment under ASC 605 whereby front-end sales charges earned for the sale execution of certain share classes were presented net of the amounts retained by unaffiliated third-party dealers and banks. These front-end sales charges earned are now presented on a gross basis under ASC 606.

The impact of adoption of ASC 606 on the Company's condensed consolidated statement of operations was as follows:
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
($ in Thousands)
As
Reported
 
Balance
Under
Prior
ASC 605
 
Effect of
Change
Higher/(Lower)
 
As
Reported
 
Balance
Under
Prior
ASC 605
 
Effect of
Change
Higher/(Lower)
Revenues
 
 
 
 
 
 
 
 
 
 
 
Distribution and service fees
$
13,549

 
$
11,455

 
$
2,094

 
$
26,156

 
$
22,826

 
$
3,330

 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
Distribution and other asset-based expenses
$
23,721

 
$
21,627

 
$
2,094

 
$
46,012

 
$
42,682

 
$
3,330



9


    

4. Business Combinations

RidgeWorth Investments

On June 1, 2017, the Company acquired RidgeWorth Investments (the "Acquisition" or the "Acquired Business"), a multi-boutique asset manager with approximately $40.1 billion in assets under management, including $35.7 billion in long term assets under management and $4.4 billion in liquidity strategies.

The total purchase price of the Acquisition was $547.1 million, comprising $485.2 million for the business and $61.9 million for certain balance sheet investments. The Company accounted for the acquisition in accordance with ASC 805. The purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the Acquisition. No incremental measurement period adjustments were recorded in the three and six months ended June 30, 2018, the measurement period was complete on June 1, 2018.

The following table summarizes the identified acquired assets and liabilities assumed as of the acquisition date:
 
June 1, 2017
($ in thousands)
 
Assets:
 
Cash and cash equivalents
$
39,343

Investments
5,516

Accounts receivable
20,311

Assets of consolidated investment products ("CIP")
 
Cash and cash equivalents of CIP
38,261

Investments of CIP
899,274

Other assets of CIP
19,158

Furniture, equipment and leasehold improvements
5,505

Intangible assets
275,700

Goodwill
163,365

Deferred taxes, net
6,590

Other assets
3,003

Total Assets
1,476,026

Liabilities
 
Accrued compensation and benefits
18,263

Accounts payable and accrued liabilities
11,858

Other liabilities
2,601

Liabilities of consolidated investment products ("CIP")
 
Notes payable of CIP
770,160

Securities purchased payable and other liabilities of CIP
109,881

Noncontrolling Interests of CIP
16,181

Total Liabilities & Noncontrolling Interests
928,944

Total Net Assets Acquired
$
547,082



10


Income of the Acquired Business subsequent to the effective closing date of the Acquisition of June 1, 2017 within the quarter ended June 30, 2017, was as follows:
 
One Month Ended
 
June 30, 2017
($ in thousands)
 
Total Revenues
$
11,536

Restructuring and severance
$
8,396

All other operating expenses
$
8,564

Operating Income (Loss)
$
(5,424
)
Income (Loss) Before Income Taxes
$
(5,398
)
    
The following unaudited pro forma condensed consolidated results of operations are provided for illustrative purposes only and assume that the acquisition occurred on January 1, 2016. The unaudited pro forma information also reflects adjustment for transaction and integration expenses as if the Acquisition had been consummated on January 1, 2016. This unaudited information should not be relied upon as being indicative of historical results that would have been obtained if the Acquisition had occurred on that date, nor of the results that may be obtained in the future.
 
Three Months Ended
 
Six Months Ended
 
June 30, 2017
 
June 30, 2017
($ in thousands, except per share amounts)
 
 
 
Total Revenues
$
119,803

 
$
237,395

Net Income (Loss) Attributable to Common Stockholders
$
(2,724
)
 
$
9,982

 
 
 
 
Basic EPS
$
(0.39
)
 
$
1.47

Diluted EPS
$
(0.39
)
 
$
1.42


Identifiable Intangible Assets Acquired

In connection with the allocation of the purchase price, we identified the following intangible assets:
 
June 1, 2017
 
Approximate Fair Value
 
Weighted Average of Useful Life
($ in thousands)
 
 
 
Definite-lived intangible assets:
 
 
 
Mutual fund investment contracts
$
189,200

 
16.0 years
Institutional and retail separate account investment contracts
77,000

 
10.4 years
Trademarks/Trade names
800

 
10.0 years
Total definite-lived intangible assets
267,000

 
 
Indefinite-lived intangible assets:
 
 
 
Trade names
8,700

 
N/A
Total identifiable intangible assets
$
275,700

 
 

Sustainable Growth Advisers, LP
On February 1, 2018, the Company entered into an agreement to acquire a majority interest in Sustainable Growth Advisers, LP ("SGA"), an investment manager specializing in U.S. and global growth equity portfolios (the "Transaction"). The Transaction closed effective July 1, 2018.




11


5. Intangible Assets, Net

Intangible assets, net are summarized as follows: 
 
June 30, 2018
 
December 31, 2017
($ in thousands)
 
 
 
Definite-lived intangible assets:
 
 
 
Investment contracts
$
425,747

 
$
425,747

Accumulated amortization
(177,369
)
 
(167,309
)
Definite-lived intangible assets, net
248,378

 
258,438

Indefinite-lived intangible assets
43,516

 
43,516

Total intangible assets, net
$
291,894

 
$
301,954


Activity in intangible assets, net is as follows: 
 
Six Months Ended June 30,
 
2018
 
2017
($ in thousands)
 
 
 
Intangible assets, net
 
 
 
Balance, beginning of period
$
301,954

 
$
38,427

Additions (1)

 
275,700

Amortization
(10,060
)
 
(2,046
)
Balance, end of period
$
291,894

 
$
312,081


(1) See Note 4 for details on the acquired intangible assets related to the Acquisition.

Estimated amortization expense of intangible assets for the remainder of fiscal year 2018 and succeeding fiscal years is as follows:
($ in thousands)
 
 
Fiscal Year
 
Amount
2018
 
$
10,049

2019
 
20,043

2020
 
19,878

2021
 
19,867

2022
 
19,742

2023 and thereafter
 
158,799

 
 
$
248,378





12


6. Investments
At June 30, 2018 and December 31, 2017, the Company's investments were as follows:
 
June 30, 2018
 
December 31, 2017
($ in thousands)
 
 
 
Marketable securities
$
61,401

 
$
66,424

Equity method investments
12,230

 
11,098

Nonqualified retirement plan assets
6,909

 
6,706

Investments in collateralized loan obligations
5,744

 
23,339

Other investments
925

 
925

Total investments
$
87,209

 
$
108,492

Marketable Securities
Marketable securities consist primarily of investments in the Company's sponsored mutual funds, excluding the investments in consolidated investment products discussed in Note 15. The composition of the Company’s marketable securities is summarized as follows:
June 30, 2018
 
Cost
 
Unrealized
Loss
 
Unrealized
Gain
 
Fair
Value
($ in thousands)
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
Sponsored funds
$
40,235

 
$
(895
)
 
$
1,333

 
$
40,673

Equity securities
14,018

 
(10
)
 
3,000

 
17,008

Sponsored closed-end funds
3,778

 
(360
)
 
302

 
3,720

Total marketable securities
$
58,031

 
$
(1,265
)
 
$
4,635

 
$
61,401


December 31, 2017
 
Cost
 
Unrealized
Loss
 
Unrealized
Gain
 
Fair
Value
($ in thousands)
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
Sponsored funds
$
47,084

 
$
(1,294
)
 
$
1,059

 
$
46,849

Equity securities
13,141

 
(2
)
 
2,671

 
15,810

Sponsored closed-end funds
3,761

 
(302
)
 
306

 
3,765

Total marketable securities
$
63,986

 
$
(1,598
)
 
$
4,036

 
$
66,424


For the three and six months ended June 30, 2018, the Company recognized net realized gains of $1.7 million and $1.3 million, respectively, on marketable securities. For the three and six months ended June 30, 2017, the Company recognized net realized losses of $1.8 million and $1.9 million, respectively, on marketable securities.




13


7. Fair Value Measurements
The Company’s assets and liabilities measured at fair value on a recurring basis, excluding the assets and liabilities of consolidated investment products, which are separately discussed in Note 15, as of June 30, 2018 and December 31, 2017 by fair value hierarchy level were as follows:
June 30, 2018  
 
Level 1
 
Level 2
 
Level 3
 
Total
($ in thousands)
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
99,441

 
$

 
$

 
$
99,441

Marketable securities:
 
 
 
 
 
 
 
Sponsored funds
40,673

 

 

 
40,673

Equity securities
17,008

 

 

 
17,008

Sponsored closed-end funds
3,720

 

 

 
3,720

Other investments:
 
 
 
 
 
 
 
Investments in collateralized loan obligations

 

 
5,744

 
5,744

Nonqualified retirement plan assets
6,909